Stocks Long for Vote of Confidence

The election is coming right up. It seems pretty certain that Sen. Barack Obama (D., Ill.) is going to be the next president. And as anyone who's been reading my columns knows, I think his economic policies are going to be bad for the stock market and bad for economic growth in the long term. I won't be voting for him.

I think it's no coincidence that stocks were at all-time highs a year ago, when there was no chance that Obama would be elected president. Over the last 12 months, as Obama's odds have improved, the stock market has fallen. Now that his election is a virtual certainty, stocks are making five-year lows.

All that said, I've started to think that Obama might be just exactly what the stock market and the economy need right now, in the short term. I'll explain why in a minute, but first, let me get my long-term objections off my chest.

Obama wants to raise taxes, including taxes on capital. He wants the tax rate on capital gains and on dividends to be higher than they are today. He's a smart man, so he should know that when you tax something, you get less of it. That's why we slap huge taxes on cigarettes and alcohol, to discourage people from buying them. If we put a tax on capital, people will invest less. It's that simple.

His tax cuts for middle- and lower-income workers aren't tax cuts at all, because those people don't pay any income taxes anyway. What he's proposing are "refundable credits," under which the IRS will send you a check if you have certain expenses, such as college tuition. The problem with this is that if your income rises, you lose the credits. So you have a very strong incentive not to make any more money than you're making now. That's not good for growth.

And Obama is a protectionist. He wants to make it harder for U.S. companies to trade with foreign countries, all in the name of increasing employment here at home. Global trade has been an utterly indispensible force for growth over the last three decades, and anyone who puts that at risk is playing with economic dynamite.

I could go on, but suffice it to say that I think that Obamanomics is about as wrong-headed as you can get.

But there's one thing that Obama offers the market and the economy right now, which just happens to be the one thing that is most needed. I can sum it up in a single word: confidence.

Whatever his faults, Obama is a natural leader. He inspires people. He motivates people. He makes them feel good about themselves.

Right now that counts for a lot, because the markets and the economy are seized by fear. I know I'm afraid, and I'm sure you are too. Stocks are off almost 40% in just a year, volatility is at all-time highs, and it seems that almost every day some horrible new aspect of the credit crisis bursts into the headlines. You'd be crazy not to be afraid.

Fear itself is a large part of the problem. When investors are scared to buy, stocks fall -- and that makes everyone even more scared. Banks are afraid to make loans, so businesses are failing. That makes banks even more afraid to make loans.

But at the same time, opportunity is everywhere. Stocks haven't been this cheap in a generation. Most investors simply have never seen values like this at any time during their careers.

I've been telling myself for years that an opportunity like this would come, and that when it did I'd be ready. It's what we wait for. It's what we hope for. It's the kind of opportunity that Warren Buffett had in the 1970s when he made his first big strategic investments that, 30 years later, made him the richest man in the world.

But now that the opportunity is here, we're all too scared to act on it.

We look at stocks that have been virtually wiped out over the last year, and instead of opportunity, we see risk. I guess it's human nature. There must be something in our brains that automatically extrapolates any trend into the future: Whatever is happening we assume will keep happening.

That's what drove investors to buy dot-com stocks at the bubble top in 2000. And it's what drives investors to sell everything and anything right now.

Even our logic fails us. We all implicitly believe in the "efficient market hypothesis." We think that when stocks fall as violently as they have, there must be a good reason for it -- further credit collapse, global recession, whatever.
But all that fails to capture one very simple fact. When stock prices fall in anticipation of some horrible thing that will happen in the near future, then when that horrible thing actually happens, stocks don't need to fall anymore, or at least not much. They already have.

And if the horrible thing doesn't happen, then stocks are set up for a substantial upside. But for that logic to prevail, we have to overcome our fear, and that's where Obama comes in.

Think of him as a general in a war. He's not really a very good strategist. But he inspires confidence, and his men love him. They're willing to fight and die for him. So even if he sends his men off in the wrong direction, they might still end up winning the war just because they'll fight so darn hard with the confidence he's inspired in them.

It's confidence that finally ends bear markets. It's confidence that finally ends all recessions. There's simply nothing else that can do it. There's no substitute. And confidence may be the one thing Obama is good at.

So let's play out the scenario. Stocks continue to flounder for another couple of weeks. Then the election, and Obama wins by a landslide. He starts making some speeches about how everything is going to be OK. He starts announcing a few key appointments -- a Treasury secretary, for example, hand-picked to inspire confidence the same way Obama does. He puts together some kind of advisory committee of people who everyone knows and trusts: Warren Buffett, Paul Volcker, Robert Rubin. It doesn't matter whether these people actually have any good ideas -- they probably won't -- we just have to feel good that they're there.

By the time Obama is inaugurated, stocks are 20% higher and the economy has stabilized. Obama is hailed as a genius; the man who saved the world just by showing up.

OK, maybe I'm just trying to make lemonade out of a political lemon. But I do believe that confidence is key here, more important now than any objective reality in unlocking the opportunities in stocks. If Obama can deliver that, then more power to him.